Fitch Affirms IIFIG Government Liquidity Fund at 'AAAf' /'S1'
The affirmation of the Fund Credit Quality Rating is driven by the very high and stable credit quality of the fund as measured by its weighted average rating factor (WARF), which is consistent with a 'AAAf' Fund Credit Quality Rating. The rating factors in both the quality of repo counterparties and repo collateral, consistent with Fitch's approach to assessing counterparty risk.
The affirmation of the Fund Market Risk Sensitivity Rating is driven by the fund's very low sensitivity to interest rate and spread risks, as reflected in the fund's maturity profile.
KEY RATING DRIVERS
Weighted Average Credit Quality
The fund has very high weighted average credit quality, consistent with a 'AAAf' Fund Credit Quality Rating. The fund invests primarily in repo agreements whereby it repos in assets in exchange for cash (out). In all cases the quality of the repo collateral is high as the fund only accepts debt securities issued by the UK government as collateral. Repo counterparties can be banks rated 'A-' or higher or other, unrated, counterparties. In its rating criteria, Fitch looks to the credit quality of the counterparty and the collateral and when relevant, margining policy for assessing the overall credit quality of the portfolio.
While the fund may have exposure to unrated repo counterparties, Fitch views the financial resources available to these entities as sufficient to meet their obligations under the repo contracts. Should any of these counterparties fail in their obligations, the fund would remain the legal owner of the collateral. The repo agreements with all counterparties are governed by standard repo documentation.
Portfolio Sensitivities to Market Risks
The fund has very low exposure to interest rate and spread risks. The maximum individual asset (or repo contract) maturity is 397 days. Interest rate risk is managed within a maximum weighted average maturity (WAM) to interest rate reset date limit of 60 days. Spread risk is managed through a weighted average life (WAL) to final maturity limit of 120 days. However, the maturity of repo collateral can be considerably longer. The combination of maturity limits result in a market risk profile consistent with a 'S1' Fund Market Risk Sensitivity Rating.
The fund is a sub-fund of LDI Solutions Plus plc, an Irish-domiciled qualifying investor alternative investment fund. As such it falls outside of the UCITS regulations and is able to engage in term repo. It operates with a constant net asset value per share and its investment guidelines mean that it meets the European Securities and Markets Authority's (ESMA) definition of a short-term money market fund. Its total assets stood at GBP610m as of end-August 2016.
Fitch assesses Insight to be suitably qualified, competent, and capable of managing the fund. Insight was established in 2002, and is one of 13 specialist asset managers owned by Bank of New York Mellon (AA/Stable/F1+). Insight managed GBP499bn of assets as of end-June 2016. The fund's investment manager is Insight Investment Funds Management Limited, which has sub-delegated this function to Insight Investment Management (Global) Limited.
The ratings may be sensitive to material changes in the fund's credit quality or market risk profile. A material adverse deviation from Fitch's guidelines for any key rating driver could cause Fitch to downgrade the ratings. For example, if credit deterioration occurs such that the WARF increases beyond criteria levels for the rating assigned, the rating may be downgraded. Fitch's WARF stress testing shows that the rating is robust at the current rating level.
The recent downgrade of the UK following the Brexit vote has not affected the rating of IIFIG Government Liquidity Fund; however, further downgrades to the UK sovereign could ultimately lead to the rating being downgraded given the fund's high exposure to gilt collateral. This risk is currently mitigated by the ultra-short term of the fund's repo contracts and the quality of the counterparties.
Potential downgrades to the Fund Market Risk Sensitivity Rating are limited in scope, given the fund's low sensitivity to interest rate and spread risks, and the fund's investment guidelines.
APPLICABLE RATING CRITERIA
Fitch has chosen to rate the fund under its Global Bond Fund Rating Criteria. The fund meets the ESMA definition for a short-term money market fund. However, Fitch does not believe its Global Money Market Fund Rating Criteria is applicable to this fund.
Specifically, Fitch has identified material differences between this fund and other funds it rates under its Global Money Market Fund Rating Criteria which also meet the ESMA short-term money market fund definition. Above all, the fund engages in repo practices which Fitch would be unable to assess under its Global Money Market Fund Rating Criteria but is able to assess under its Global Bond Fund Rating Criteria.
Furthermore, unlike other money market funds the fund is not a UCITS fund and does not offer same-day settlement. Accordingly Fitch believes that its Global Bond Fund Rating Criteria are applicable and provide the most appropriate tools for assessing the risks in this fund.